Got extra cash? Go commercial

After a surge in house values, Brits are looking for new ways to invest. Commercial property is a great long-term prospect, says Christopher Browne

Wednesday 21 January 2004 00:00 BST

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Is there more? we ask one another as we bask in our new-found roles as homeowners, landlords and property speculators. The quick answer is yes, there certainly is. Another sector worth an estimated £30bn is starting to take off - even though many of us may not know too much about it. It's known as commercial property investment. Quite simply, it's a more sophisticated version of buy-to-let and covers everything commercial or industrial from your local corner-shop to the out-of-town hypermarket. And even though you cannot exactly live in a factory, you can make a handsome profit out of owning one.

Is there more? we ask one another as we bask in our new-found roles as homeowners, landlords and property speculators. The quick answer is yes, there certainly is. Another sector worth an estimated £30bn is starting to take off - even though many of us may not know too much about it. It's known as commercial property investment. Quite simply, it's a more sophisticated version of buy-to-let and covers everything commercial or industrial from your local corner-shop to the out-of-town hypermarket. And even though you cannot exactly live in a factory, you can make a handsome profit out of owning one.

So how do you break into this large and lucrative sector? Before anything else, you must take sound advice. Putting money into a wine bar or business park may sound straightforward enough, but you need to do your homework first. Top of your hit-list is knowledge. Remarkably few books cover the sector, but The Guide to Commercial Property Investment 2004 has just been published. Written by investors and writers Richard Bowser and Kevin Smith, it has advice on the best cash sources, recommended buying sectors, lettings agents and brokers, how to plan a project, lists of contacts and the risk factor.

Bowser, who's just moved from residential to commercial investing, says: "While buy-to-let is based on short-term leases of six months to two years, commercial property is a far longer-term prospect, with leases averaging 10, 15 and 20 years. It is also much less prone to market fluctuations than residential investing."

Once you've done the reading, have a deposit and know the type of property you wish to invest in, you need to approach a lender. In almost all cases you should do this via a broker. They will help with the legal side, have a clutch of lenders they can approach and will guide you through the application. David Whittaker, managing director of Mortgages for Business, says: "Always start on a small scale. The ideal package for someone who has done buy-to-let for two or three years is to buy a shop with two flats above it. As you've already done residential letting, you'll need to mix this with some commercial expertise."

The success of your investment rests on the quality of your tenant. He or she must be a blue-chip performer with a thriving business and a good track record, for when the lease is signed, it's the start of a longstanding business relationship. If it succeeds the partnership blooms, if it fails you'll both face messy divorce proceedings.

Over the past 30 years the commercial sector's average annual yield has been 7 per cent. This compares with a good residential one of 10 per cent and a poor one of 2 to 3 per cent, so commercial property investment forms a solid, unyielding wedge in the middle. The sector is showing pleasing shoots of growth, particularly in the London offices market, and the lenders have responded accordingly.

Most high-street banks will give you a commercial mortgage provided you have a solid set of accounts or a respectable income and a sound rental agreement. Otherwise you should approach a specialist lender like Paragon Finance or Commercial First, preferably via your broker. And if you have a self-invested personal pension scheme worth £50,000 plus you could use that too to join this challenging sector.